Tuesday, June 19, 2012

Even in the 1930s, what I gather from Larry White's "Hayek's Monetary Theory and Policy: A Critical Reconstruction" (thanks to a comenter for sharing this the other day) is that what he was really talking about was a constant MV (and even that was after he was forced to clarify an earlier position of a constant M).

Now ask yourself - do you think Scott Sumner would like to see constant MV right now???

Elsewhere you can find talking about productivity norm (I haven't read Hayek as widely as others, but I've seen him raise this when he complains about being called a deflationist).

That's not NGDP targeting either.

The other thing you hear is that Hayek was clear he didn't want money expenditures to collapse in the Depression.

Well right. But that's not NGDP targeting either.

And then of course there's that pesky prize lecture of his:

"The theory which has been guiding monetary and financial policy
during the last thirty years, and which I contend is largely the product
of such a mistaken conception of the proper scientific procedure,
consists in the assertion that there exists a simple positive
correlation between total employment and the size of the aggregate
demand for goods and services; it leads to the belief that we can
permanently assure full employment by maintaining total money expenditure at an appropriate level.
Among the various theories advanced to account for extensive
unemployment, this is probably the only one in support of which strong
quantitative evidence can be adduced. I nevertheless regard it as
fundamentally false, and to act upon it, as we now experience, as very
harmful.”

So Hayek was comfortable with adjustments to compensate for fluctuations in MV. At first people thought he was talking about a stable M, then he clarified that M might move if V moves to guarantee a stable MV.

And of course if you ask Current he will tell you (rightly) that in fact MV does not even equal PY, it equals PT (price level times transactions).

What a monetarist would say is that V in MV=PY represents "income velocity". Income velocity is the number of income earning transactions per unit time per unit of money.

But, that's a strange kind of "velocity". It means that if I spend £100 on shares then that contributes nothing to income velocity. The person I buy the shares off may then spend the £100 I supply on bonds, that too contributes nothing to income velocity. The person who he buys the bonds from may spend the £100 on land, that also contributes nothing to monetarist V. But, if the person selling the land spends the £100 on a new car or a new tractor then that final transaction does contribute to income velocity. The relevant delay in this case is the time it takes for this chain to occur.

"... permanently assure full employment by maintaining total money expenditure at an appropriate level."

If Hayek were alive I bet he'd say something like "I said full employment not trend output". Hayek does prescribe keeping MV=PY constant at times, and at others allowing it to fall at the rate productivity increases. But, he doesn't think that keeping it constant will cause full employment. Indeed, does anyone else? I think the Market Monetarists argue that it's best for long term growth and helps get out of recessions, but they don't say it will lead to full employment after recessions.

What Hayek is criticising here is the 70s policy of applying stimulus as long unemployment is high, regardless of what happens to price inflation.

“The moment there is any sign that the total income stream may actually shrink [during a post-bust deflationary crash], I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.” -- F. A. Hayek

Yes, and the distinction is clearer in Bob's initial post which specifically criticizes the idea that Hayek agrees with Sumner.

Hayek did support one or another form of constant nominal expenditures (with a productivity norm in mind or without), and you could call that "NGDP targeting" in the sense that the target stays still. But that's clearly not what the term means now and it is very misleading to argue that he agrees with Scott Sumner.